Process Selection and Capacity Planning Chapter 5 Process Selection and Capacity Planning

Process Selection How an organization chooses to produce its goods or provide its services Key aspects make or buy decisions capital intensity process flexibility MTSU Management 362

Process Selection and System Design Figure 5-1 Capacity planning Forecasting Facilities and Equipment Product and service design Process selection Layout Technological change Work design MTSU Management 362

Process Selection and Capacity Planning Make or Buy? Available capacity Expertise Quality considerations The nature of demand Cost MTSU Management 362

Continuous Processing Repetitive/Assembly Type of Operation Continuous Processing Repetitive/Assembly Semicontinuous Intermittent/Batch Processing Job Shops Small runs Projects Nonroutine jobs MTSU Management 362

Variety, Flexibility, & Volume Table 5-16 Variety, Flexibility, & Volume Job Shop Batch Repetitive assembly Continuous Flow MTSU Management 362

Product-Process Life Cycle Matrix Few Major Products, Higher Volume High Volume, Standard- ization Low Volume One of a Kind Multiple Products, Low Volume Flexibility- Quality Job Shop Commercial Printer Batch Heavy Equipment Assembly Line Automobile Assembly Continuous Flow Sugar Refinery Dependability Cost Flexibility-Quality Dependability-Cost MTSU Management 362

Automation (1 of 2) Processes that have sensing and control devices that enable it to operate automatically Three kinds fixed programmable computer-aided design and manufacturing systems (CAD/CAM) numerically controlled (NC) machines robot MTSU Management 362

Automation (2 of 2) flexible manufacturing cells flexible manufacturing systems (FMS) computer-integrated manufacturing (CIM) MTSU Management 362

The basic questions in capacity handling are Capacity Planning Capacity is the upper limit or ceiling on the load that an operating unit can handle The basic questions in capacity handling are What kind of capacity is needed? How much is needed? When is it needed? MTSU Management 362

Importance of Capacity Decisions Impact the ability of the firm to meet future demands for products and services Affect operating costs Usually a major determinant of initial cost Involves long-term commitment of resources and difficult to modify Affect competitiveness MTSU Management 362

Types of Capacity Design capacity Effective capacity Actual output maximum obtainable output Effective capacity Maximum capacity given product mix, scheduling difficulties, and other doses of reality. Actual output rate of output actually achieved--cannot exceed effective capacity. MTSU Management 362

Efficiency and Utilization Actual output Efficiency = Effective capacity Utilization = Design capacity MTSU Management 362

Efficiency/Utilization Example Design capacity = 50 trucks/day Effective capacity = 40 trucks/day Actual output = 36 units/day Actual output = 36 units/day Efficiency = = 90% Effective capacity 40 units/ day Utilization = Actual output = 36 units/day = 72% Design capacity 50 units/day MTSU Management 362

Determinants of Effective Capacity Facilities Products or services Processes Human considerations Operations External forces MTSU Management 362

Some Possible Growth Patterns Figure 5-4 Volume Volume Growth Decline Time Time Cyclical Stable Volume Volume Time Time MTSU Management 362

Developing Capacity Alternatives Design flexibility into systems Take a “big picture” approach to capacity changes Prepare to deal with capacity “chunks” Attempt to smooth out capacity requirements Identify the optimal operating level MTSU Management 362

Production units have an optimal rate of output for minimal cost. Figure 5-6 Optimal Output Rate Production units have an optimal rate of output for minimal cost. Average cost per unit Minimum cost Rate of output MTSU Management 362

Figure 5-7 Minimum cost & optimal operating rate are functions of size of production unit. Small plant Average cost per unit Medium plant Large plant Output rate MTSU Management 362

Evaluating Alternatives Calculating processing requirements Cost-Volume analysis Financial analysis Decision theory Waiting line analysis MTSU Management 362

Calculating Processing Requirement (Example 2, page 218) MTSU Management 362

Calculating Processing Requirements - Example 2 One eight shift/day 250 days a year = 8 hr/day x 250 days/yr = 2000 hr/machine/yr MTSU Management 362

Break-Even Analysis (1 of 2) Objective is to find the point, in dollars and units, at which costs equal revenues Costs Fixed - continue even if no units are produced Variable - vary with the volume of units produced labor material MTSU Management 362 14 14 14 14 14

Crossover charts (see page 224) Break-Even (2 of 2) Revenue function - begins at the origin and increases by the selling price of each unit Crossover charts (see page 224) uses cost-volume relationships to identify which alternative has the lowest total cost for a particular volume range MTSU Management 362 15 15 15 15 15

Cost-Volume Relationships Figure 5-8a Amount ($) Q (volume in units) Total cost = VC + FC Total variable cost (VC) Fixed cost (FC) MTSU Management 362

Cost-Volume Relationships Figure 5-8b Amount ($) Q (volume in units) Total revenue MTSU Management 362

Breakeven Chart Volume (units/period) Total revenue line Breakeven point Total cost = Total revenue Profit corridor Total cost line Cost in Dollars (Thousands) Variable cost Loss corridor Fixed cost Volume (units/period) MTSU Management 362 16 16 16 16 16 16

Example - 3 Equipment lease = FC = $6,000.00 Cost per pie = VC = $2.00 Revenue per pie = Rev = $7.00 How many pies must be sold in order to break even? MTSU Management 362

Example - 3 Equipment lease = FC = $6,000.00 Cost per pie = VC = $2.00 Revenue per pie = Rev = $7.00 What would be the profit (loss) be if 1,000 pies are made and sold in a month? MTSU Management 362

Example - 3 Equipment lease = FC = $6,000.00 Cost per pie = VC = $2.00 Revenue per pie = Rev = $7.00 How many pies must be sold to realize a profit of $4,000? MTSU Management 362

Total cost for Alternative 1 Total cost for Alternative 3 Crossover Chart Variable cost $ $ $ Variable cost Variable cost Fixed cost Fixed cost Alternative 1 Purchase Alternative 2 Process A Alternative 3 Process B Total cost for Alternative 1 Total cost for Alternative 2 Total cost for Alternative 3 X Volume MTSU Management 362 18 18 18 18 18 18

Total cost for Alternative 1 Total cost for Alternative 3 Crossover Chart Variable cost $ $ $ Variable cost Variable cost Fixed cost Fixed cost Alternative 1 Purchase Alternative 2 Process A Alternative 3 Process B Total cost for Alternative 1 Total cost for Alternative 2 Total cost for Alternative 3 Total Cost Line X Volume MTSU Management 362 18 18 18 18 18 18

Finding Crossover Volumes At a crossover volume, X, the total cost of one alternative equals the total cost of another alternative. Thus TC1 = TC2 FC1+VC1(X) = FC2+VC2(X) VC1(X) = FC2+VC2(X)-FC1 VC1(X)-VC2(X) = FC2-FC1 (VC1-VC2)(X) = FC2-FC1 X = (FC2-FC1)/(VC1-VC2) MTSU Management 362

Finding Crossover Volume A company must choose between two processes. The fixed and variable costs for each alternative are FC1 = $170,000 FC2 = $190,000 VC1 =$9 VC2 =$4 Over what volume ranges would you prefer each alternative? MTSU Management 362

Total cost for Alternative 2 Crossover Chart Variable cost $ $ Variable cost Fixed cost Fixed cost Alternative 1 Alternative 2 Total cost for Alternative 1 Total cost for Alternative 2 $ Total Cost Line prefer alt.1 prefer alternative 2 Volume X MTSU Management 362 18 18 18 18 18 18

Other Evaluation Approaches Financial analysis Cash Flow - the difference between cash received from sales and other sources, and cash outflow for labor, material, overhead, and taxes Present Value - the sum, in current value, of all future cash flows of an investment proposal Decision theory Waiting line analysis MTSU Management 362

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